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Incorporation - How and Why

Anthony Fielding (Bluenose Accounting) and Jackie Farrow (Farrow Law) presented on the benefits of Incorporation and outlined the steps to the membership of the Hammonds Plains Area Business Association (HPABA) on May 22. Incorporation provides liability protection for personal assets and tax saving opportunities. Many businesses incorporate to achieve tax savings but the liability reason is often enough to justify even if little opportunity exists for tax savings.

A business owner's personal residence and other assets are at risk should an unincorporated business be sued. The process of incorporation involves many steps but is facilitated by your lawyer. A name is chosen that must include certain elements including a descriptive component. A name search is undertaken and once approved; the articles of incorporation are drafted and submitted to the Registry of Joint Stocks. A recognized agent and address are chosen. Various registers, including those listing the directors and shareholders of the company, are created. The share structure is generally designed with the help of an accountant familiar with the finances of the shareholders to facilitate tax planning.

Tax savings can be achieved by one of two means. Income earned within a corporation is subject to a 14% tax rate and would only attract personal tax if withdrawn from the corporation. Leaving corporate earnings in the company account results in the retention of eighty-six cent dollars. Of course most business owners need the money their business makes but the more they can leave in the company, the more they have to invest be it for retirement savings or growing the business.

It was confirmed that the corporate structure will never result in more tax payable than would a sole proprietor. However, real savings can be achieved by income splitting with two or more individuals. Put simply, two people earning say forty thousand pay less combined tax than one earning eighty thousand. The corporate structure also allows one to bypass the CPP program which has its limitations. Examples were given showing how a business earning $100,000 could save over $10,000 in tax if set up properly. To achieve income splitting, one can use different classes of shares or a family trust.

There are many types of trusts. Family (income splitting) trusts allow individuals to receive money from a corporation without owning shares. Income splitting is flexible and beneficiaries can be named in general terms, such as spouse or children, rather than stating specific names. This type of trust does not result in additional tax savings over a pure share based income splitting model but does have advantages such as greater acceptance by Canada Revenue Agency and some elements of additional liability protection. The ability to split the tax-free gain upon sale of a business across multiple beneficiaries was discussed. Other types of trusts mentioned included holding trusts to protect non-business personal real estate and testamentary trusts created as part of a will.

Incorporation is not for everyone and the presenters emphasized that cooperation between the business owner, accountant and lawyer is essential to make sure that it is appropriate to incorporate and, if so, how to best structure the corporation to make the most of tax planning opportunities. Please contact us if you want to learn more about incorporation.

Filed in: Advice Articles, Company News & Announcements
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